1 00:00:03,870 --> 00:00:06,330 Sean Aman: Welcome to the Fear and Greed Business Interview. I'm Sean 2 00:00:06,420 --> 00:00:09,449 Sean Aman: Aylmer. In the last week, Microsoft has become the second 3 00:00:09,450 --> 00:00:14,009 Sean Aman: US company to hit the $ 3 trillion market valuation. Apple 4 00:00:14,009 --> 00:00:16,889 Sean Aman: reached that milestone mid last year. The size of these 5 00:00:16,889 --> 00:00:20,280 Sean Aman: companies is staggering. Individually, they're worth more than the total 6 00:00:20,280 --> 00:00:23,430 Sean Aman: value of every company on the ASX combined, but it 7 00:00:23,430 --> 00:00:26,009 Sean Aman: also raises a lot of questions for investors, including what 8 00:00:26,009 --> 00:00:30,269 Sean Aman: happens when the seven tech stocks, Apple, Microsoft Alphabet, Amazon, 9 00:00:30,270 --> 00:00:34,379 Sean Aman: Nvidia, Meta and Tesla, make up about 28% of the S&P 10 00:00:34,379 --> 00:00:37,710 Sean Aman: 500. Remember, this is general information only and you should 11 00:00:37,710 --> 00:00:40,470 Sean Aman: always seek professional advice before making investment decisions. In the 12 00:00:40,470 --> 00:00:43,440 Sean Aman: past, we've had some terrific insights into Wall Street from 13 00:00:43,440 --> 00:00:46,350 Sean Aman: Catriona Burns, part of the team at Wilson Asset Management. 14 00:00:46,650 --> 00:00:50,069 Sean Aman: Catriona is the Lead Portfolio Manager for WAM Global, and 15 00:00:50,070 --> 00:00:52,498 Sean Aman: joins me again from New York. Catriona, welcome back to 16 00:00:52,500 --> 00:00:53,159 Sean Aman: Fear and Greed. 17 00:00:53,549 --> 00:00:54,870 Catriona Burns: Thanks so much for having me. 18 00:00:55,320 --> 00:00:58,290 Sean Aman: So let's get some context first, just how fast have 19 00:00:58,290 --> 00:01:00,420 Sean Aman: these tech stocks grown over the past year or so, 20 00:01:00,660 --> 00:01:01,380 Sean Aman: the big seven? 21 00:01:02,580 --> 00:01:07,499 Catriona Burns: The Mag Seven are up over 100% relative to MSCI World, which is 22 00:01:07,500 --> 00:01:11,730 Catriona Burns: up about 23%, and the S&P 500, which is up 23 00:01:11,730 --> 00:01:13,050 Catriona Burns: about 26%. 24 00:01:13,800 --> 00:01:14,850 Sean Aman: Okay. Why? 25 00:01:15,780 --> 00:01:18,959 Catriona Burns: Within the Mag Seven, it's quite an interesting collection of 26 00:01:18,959 --> 00:01:22,889 Catriona Burns: businesses that have quite a few differences between them, but 27 00:01:22,950 --> 00:01:26,069 Catriona Burns: I'd say one of the large factors is that as 28 00:01:26,069 --> 00:01:28,259 Catriona Burns: we've gone into the backend of last year, we've had 29 00:01:28,260 --> 00:01:31,860 Catriona Burns: interest rate expectations for what the Fed would do come 30 00:01:31,860 --> 00:01:34,980 Catriona Burns: down, which has seen equity markets rocket, and this collection 31 00:01:34,980 --> 00:01:39,359 Catriona Burns: of businesses does have very strong earnings growth. So one, 32 00:01:39,360 --> 00:01:43,380 Catriona Burns: it's expectations coming down. Two, it's the earnings growth relative 33 00:01:43,380 --> 00:01:46,289 Catriona Burns: to the market for this group of stocks is very 34 00:01:46,289 --> 00:01:49,830 Catriona Burns: strong. And then thirdly, there's been all the buzz around 35 00:01:49,890 --> 00:01:53,910 Catriona Burns: AI. So a few within the group are very much 36 00:01:53,910 --> 00:01:58,559 Catriona Burns: related to artificial intelligence. And so say Nvidia, for example, 37 00:01:58,559 --> 00:02:01,949 Catriona Burns: in particular, is the one that's rocketed the most, up 38 00:02:01,950 --> 00:02:07,229 Catriona Burns: over 300%. And it's specifically related to CPU chips related 39 00:02:07,230 --> 00:02:08,880 Catriona Burns: to artificial intelligence. 40 00:02:09,540 --> 00:02:13,080 Sean Aman: Okay, so Nvidia, it's about the chips. I think Microsoft 41 00:02:13,139 --> 00:02:16,229 Sean Aman: has also done pretty well out of AI. And am 42 00:02:16,230 --> 00:02:18,150 Sean Aman: I right in saying, I'm going to say Google's the 43 00:02:18,150 --> 00:02:18,690 Sean Aman: other one, I think? 44 00:02:18,690 --> 00:02:19,470 Catriona Burns: Yep, absolutely. 45 00:02:20,160 --> 00:02:21,929 Sean Aman: That's not about chips, is it? That's about... Well, I 46 00:02:21,929 --> 00:02:24,269 Sean Aman: suppose Microsoft's about ChatGPT. 47 00:02:24,929 --> 00:02:28,919 Catriona Burns: Yes, ChatGPT and also the Copilots they're putting into their 48 00:02:28,919 --> 00:02:33,660 Catriona Burns: office suite of products and the ChatGPT ownership stake. So 49 00:02:33,660 --> 00:02:37,918 Catriona Burns: yeah, that's for Microsoft. And then Google has its AI 50 00:02:38,190 --> 00:02:44,459 Catriona Burns: equivalent to ChatGPT, Bard. So yeah, both very much benefiting 51 00:02:44,459 --> 00:02:46,020 Catriona Burns: from that AI thematic. 52 00:02:46,830 --> 00:02:49,680 Sean Aman: Okay. So before we get onto whether they can keep 53 00:02:49,680 --> 00:02:52,649 Sean Aman: going, what's it mean when you have these Magnificent Seven... 54 00:02:52,679 --> 00:02:56,580 Sean Aman: I think it's 28% of the S&P 500, thereabouts, just under 30% of the S&P 55 00:02:56,580 --> 00:03:00,659 Sean Aman: 500. As an investor, does that make it harder? 56 00:03:01,679 --> 00:03:06,810 Catriona Burns: Well, for us, it's about the individual stock and do 57 00:03:06,810 --> 00:03:09,570 Catriona Burns: they stack up in terms of the fundamentals and the 58 00:03:09,570 --> 00:03:12,839 Catriona Burns: valuation? And I guess for us, the long- term earnings 59 00:03:12,840 --> 00:03:16,199 Catriona Burns: trajectory of each of the stocks. And so you've just 60 00:03:16,199 --> 00:03:18,779 Catriona Burns: got to make a decision around, do you think those 61 00:03:18,779 --> 00:03:22,590 Catriona Burns: fundamentals stack up to justify investing in them? When there's a 62 00:03:22,590 --> 00:03:27,900 Catriona Burns: concentration of returns, we tend to love hunting down that 63 00:03:27,900 --> 00:03:32,309 Catriona Burns: small mid- cap end of the market, which we have 64 00:03:32,309 --> 00:03:35,400 Catriona Burns: had that Mag Seven drive. I think it's basically over 65 00:03:35,400 --> 00:03:39,300 Catriona Burns: 70% of S& P returns for that 2023 year. So 66 00:03:39,600 --> 00:03:42,780 Catriona Burns: you are competing against that if you don't own them. 67 00:03:42,870 --> 00:03:46,709 Catriona Burns: But we think within the world, there are many, many 68 00:03:46,710 --> 00:03:50,999 Catriona Burns: different businesses to invest in. You're obviously in a market 69 00:03:51,480 --> 00:03:55,740 Catriona Burns: where the concentration of returns is very concentrated. That can 70 00:03:55,740 --> 00:04:01,530 Catriona Burns: continue on for however long. But ultimately, the share prices 71 00:04:01,530 --> 00:04:04,710 Catriona Burns: come down to earnings growth. And so it's about the 72 00:04:04,710 --> 00:04:07,590 Catriona Burns: fundamentals of the stocks. And it's interesting, even within the 73 00:04:07,590 --> 00:04:11,999 Catriona Burns: Mag Seven, there is quite different dynamics between each of 74 00:04:12,480 --> 00:04:16,979 Catriona Burns: the stocks. And you take Apple and Tesla for example, 75 00:04:16,980 --> 00:04:22,290 Catriona Burns: and the earnings growth there is very, very different to 76 00:04:22,290 --> 00:04:27,059 Catriona Burns: something like Nvidia, which has had massive earnings upgrades through 77 00:04:27,059 --> 00:04:32,339 Catriona Burns: that 2023 year, is the earnings just beat expectations that analysts 78 00:04:32,339 --> 00:04:35,610 Catriona Burns: had. And whereas Meta, there was a lot of skepticism 79 00:04:35,610 --> 00:04:39,750 Catriona Burns: around the Facebook platform, et cetera. And then you've seen 80 00:04:40,290 --> 00:04:44,370 Catriona Burns: sentiment turn. So there's two elements that have been driving 81 00:04:44,370 --> 00:04:46,859 Catriona Burns: them, additional elements that have been driving them. One is 82 00:04:46,859 --> 00:04:50,910 Catriona Burns: like there is the earnings story, but two, you have to overlay 83 00:04:50,910 --> 00:04:54,150 Catriona Burns: what's happened to some of the valuations. And you've seen 84 00:04:54,420 --> 00:04:59,818 Catriona Burns: particularly in the case of say Microsoft, Google, Meta and 85 00:04:59,820 --> 00:05:04,320 Catriona Burns: so forth, it's not as much... Well, actually, outside Nvidia 86 00:05:04,379 --> 00:05:09,750 Catriona Burns: and Microsoft, it's been more about PE rerate than actual 87 00:05:09,750 --> 00:05:14,820 Catriona Burns: earnings growth. So yeah, it's just interesting to overlay. Is 88 00:05:14,820 --> 00:05:17,308 Catriona Burns: it the valuation that's just gone up or is it 89 00:05:17,309 --> 00:05:20,849 Catriona Burns: the earnings that have worked? Nvidia, for sure, the earnings 90 00:05:20,849 --> 00:05:23,909 Catriona Burns: have beat massively, but in some of the other cases, 91 00:05:23,910 --> 00:05:27,360 Catriona Burns: it's more a case of the PE going up a lot. 92 00:05:27,900 --> 00:05:29,820 Sean Aman: Stay with me, Catriona, we'll be back in a minute. 93 00:05:36,059 --> 00:05:39,719 Sean Aman: I'm speaking to Catriona Burns, Lead Portfolio Manager for WAM 94 00:05:39,719 --> 00:05:43,049 Sean Aman: Global. It's easy to jump on the bandwagon here, but 95 00:05:43,289 --> 00:05:48,330 Sean Aman: surely, when shares have gone up that even Nvidia, which looks fantastic, 96 00:05:48,330 --> 00:05:52,889 Sean Aman: right? But will have competitors out of China and there 97 00:05:52,889 --> 00:05:55,710 Sean Aman: will be competitors in other places and it can't run 98 00:05:55,710 --> 00:05:57,779 Sean Aman: forever. So where are valuations at the moment? 99 00:05:58,500 --> 00:06:00,869 Catriona Burns: Well, that's the interesting thing. When you look at say 100 00:06:00,869 --> 00:06:04,200 Catriona Burns: Nvidia. As I said, that earnings story has been phenomenal, 101 00:06:04,410 --> 00:06:08,970 Catriona Burns: but what you're baking in now into the valuation is 102 00:06:09,990 --> 00:06:13,169 Catriona Burns: a significant amount of expectations about what earnings will do 103 00:06:13,170 --> 00:06:18,000 Catriona Burns: going forward. And so if I look at earnings expectations 104 00:06:18,000 --> 00:06:22,440 Catriona Burns: for the coming year, they're expecting 60% revenue growth and 105 00:06:22,440 --> 00:06:27,870 Catriona Burns: 68% EPS growth, which they may do, but that's already 106 00:06:27,870 --> 00:06:31,589 Catriona Burns: in numbers. So if they miss expectations there, then it'll 107 00:06:31,589 --> 00:06:35,189 Catriona Burns: be a lot harder for the share price to necessarily 108 00:06:35,190 --> 00:06:40,349 Catriona Burns: work. So you have to marry up, have forecasts got 109 00:06:40,350 --> 00:06:44,010 Catriona Burns: ahead of themselves, or can the company continue to beat? 110 00:06:44,010 --> 00:06:47,309 Catriona Burns: So in the case of Nvidia, if they keep beating 111 00:06:47,309 --> 00:06:52,019 Catriona Burns: what the market has for consensus numbers, this share price 112 00:06:52,020 --> 00:06:57,180 Catriona Burns: can certainly keep working, but they need to. It's already 113 00:06:57,480 --> 00:07:00,990 Catriona Burns: had a phenomenal run. Whereas I'd say something like, say 114 00:07:01,260 --> 00:07:06,180 Catriona Burns: Google for example, the earnings expectations aren't crazy and the 115 00:07:06,210 --> 00:07:10,020 Catriona Burns: valuation's a lot more reasonable. So very much in terms 116 00:07:10,020 --> 00:07:13,590 Catriona Burns: of whether they can keep going and where we go 117 00:07:13,590 --> 00:07:17,160 Catriona Burns: from here is about being able to meet earnings expectations 118 00:07:17,490 --> 00:07:21,480 Catriona Burns: and continuing to deliver on what the market's expecting. 119 00:07:22,290 --> 00:07:24,329 Sean Aman: So what are the biggest risks for the tech stocks? 120 00:07:24,330 --> 00:07:27,330 Sean Aman: And earlier on, you talked about the fact that interest 121 00:07:27,330 --> 00:07:29,969 Sean Aman: rates are expected to fall and a lot of tech 122 00:07:29,969 --> 00:07:32,880 Sean Aman: stocks are priced off, the discounted value is priced off 123 00:07:32,880 --> 00:07:34,440 Sean Aman: the interest rate, therefore if it goes down, it looks 124 00:07:34,440 --> 00:07:38,160 Sean Aman: better, an explainer there. But what are the big risks 125 00:07:38,160 --> 00:07:39,180 Sean Aman: for the tech stocks? 126 00:07:39,900 --> 00:07:42,719 Catriona Burns: Yeah, so I think, as you said, that is definitely 127 00:07:42,719 --> 00:07:45,929 Catriona Burns: one risk. We are now pricing into forward mark interest 128 00:07:45,929 --> 00:07:49,740 Catriona Burns: rate curves, a lot of cuts in the current year. 129 00:07:49,740 --> 00:07:53,940 Catriona Burns: So if the Fed doesn't cut rates as much as 130 00:07:54,000 --> 00:07:57,719 Catriona Burns: is expected this year, that sets up a bit of 131 00:07:57,719 --> 00:08:02,039 Catriona Burns: a valuation headwind for stocks more generally, and particularly ones 132 00:08:02,040 --> 00:08:06,420 Catriona Burns: where the valuation has run up quite a lot. So 133 00:08:06,420 --> 00:08:10,800 Catriona Burns: that's one risk that the rates cuts aren't as significant 134 00:08:10,800 --> 00:08:15,360 Catriona Burns: as people are expecting. And then that earnings piece that 135 00:08:15,360 --> 00:08:19,199 Catriona Burns: basically the numbers that analysts have in their forecast that 136 00:08:19,200 --> 00:08:23,879 Catriona Burns: the companies can't meet those expectations. And then, this long 137 00:08:23,879 --> 00:08:26,310 Catriona Burns: debated recession that we're- 138 00:08:26,310 --> 00:08:28,830 Sean Aman: I'm still waiting for it, Catriona. I'm still waiting for it. 139 00:08:29,430 --> 00:08:34,200 Catriona Burns: Exactly. Us too. If we were to start seeing the 140 00:08:34,200 --> 00:08:37,049 Catriona Burns: jobs market fall apart and so forth, and we went 141 00:08:37,049 --> 00:08:41,279 Catriona Burns: into deeper recession, then there'll be a debate around where 142 00:08:41,279 --> 00:08:43,108 Catriona Burns: earnings again, hold up. 143 00:08:43,650 --> 00:08:45,870 Sean Aman: Okay. You mentioned earlier on Catriona, it's not just about 144 00:08:45,870 --> 00:08:48,390 Sean Aman: the Magnificent Seven, and particularly at Wilson Asset Management, you 145 00:08:48,390 --> 00:08:51,120 Sean Aman: tend to go for the mid to smaller caps. How 146 00:08:51,120 --> 00:08:54,990 Sean Aman: do you play the Magnificent Seven outside the Magnificent Seven? 147 00:08:55,799 --> 00:08:59,820 Catriona Burns: Yeah, definitely. So I particularly if we thought about AI 148 00:08:59,820 --> 00:09:03,208 Catriona Burns: being just an enormous driver of what was that rhetoric 149 00:09:03,210 --> 00:09:08,460 Catriona Burns: for 2023, there are lots of different companies outside the 150 00:09:08,460 --> 00:09:11,940 Catriona Burns: Mag Seven that we think are potentially even better ways 151 00:09:12,210 --> 00:09:16,679 Catriona Burns: of paying AI or very solid ways. And where you've 152 00:09:16,679 --> 00:09:20,790 Catriona Burns: got things like... A big part of the value will 153 00:09:20,790 --> 00:09:25,710 Catriona Burns: be in owning the data. So we own companies such 154 00:09:25,710 --> 00:09:29,880 Catriona Burns: as Intuit that does the tax software, which will have 155 00:09:29,880 --> 00:09:34,139 Catriona Burns: Copilots and be using AI there. We own data providers 156 00:09:34,139 --> 00:09:39,150 Catriona Burns: like Dun & Bradstreet in the US. We own the exchanges 157 00:09:39,330 --> 00:09:43,500 Catriona Burns: like Intercontinental Exchange, which have a lot of data coming 158 00:09:43,500 --> 00:09:47,309 Catriona Burns: in. And we think it's interesting. We think whether it's 159 00:09:47,309 --> 00:09:51,839 Catriona Burns: in the platforms like Intuits and SAP, for example, out 160 00:09:51,839 --> 00:09:56,250 Catriona Burns: of Germany, we think they're great plays on AI. We think 161 00:09:56,250 --> 00:10:00,809 Catriona Burns: the data companies like Dun & Bradstreet, et cetera, are great 162 00:10:00,809 --> 00:10:04,409 Catriona Burns: ways of playing it. We own a business in the 163 00:10:04,410 --> 00:10:08,399 Catriona Burns: US called Booz Allen Hamilton, which is the provider and 164 00:10:08,400 --> 00:10:12,179 Catriona Burns: facilitator of AI to the US government. So we think there 165 00:10:12,179 --> 00:10:16,679 Catriona Burns: are lots of different ways to play AI outside of 166 00:10:16,679 --> 00:10:17,578 Catriona Burns: the Mag Seven. 167 00:10:17,970 --> 00:10:20,880 Sean Aman: Okay. And AI will be something we'll be talking about 168 00:10:20,880 --> 00:10:22,530 Sean Aman: this year, next year and the year after, you think? 169 00:10:23,550 --> 00:10:27,179 Catriona Burns: I think so. I think there's been a lot of hype, so 170 00:10:28,230 --> 00:10:31,140 Catriona Burns: you only had to say AI in your earnings call 171 00:10:31,140 --> 00:10:35,910 Catriona Burns: and the share prices were running. So I think there'll 172 00:10:35,910 --> 00:10:39,690 Catriona Burns: be some companies where it's more hype than reality, but 173 00:10:39,690 --> 00:10:43,200 Catriona Burns: I think, look, there's some very exciting applications of the 174 00:10:43,200 --> 00:10:45,480 Catriona Burns: technology as we go forward. 175 00:10:46,289 --> 00:10:48,180 Sean Aman: Catriona, thank you for talking to Fear and Greed. 176 00:10:48,629 --> 00:10:49,319 Catriona Burns: Thanks so much. 177 00:10:50,309 --> 00:10:53,790 Sean Aman: That was Catriona Burns, Lead Portfolio Manager for WAM Global. 178 00:10:53,790 --> 00:10:56,160 Sean Aman: This is the Fear and Greed Business Interview. Remember, this 179 00:10:56,160 --> 00:10:59,219 Sean Aman: is general information only and you should seek professional advice 180 00:10:59,219 --> 00:11:02,160 Sean Aman: before making investment decisions. Join us every morning for the 181 00:11:02,160 --> 00:11:05,190 Sean Aman: full episode of Fear and Greed, Australia's best business podcast. 182 00:11:05,190 --> 00:11:06,838 Sean Aman: I'm Sean Elmer. Enjoy your day.